The world of electronic options trade, according to Peterffy

A pioneer of electronic options trading, Thomas Peterffy has been described as a Wall Street legend. Peterffy answered a few questions from Automated Trader by email for our article on trends in electronic options trading.

Born in Budapest in 1944, Thomas Peterffy came to the United
States in 1965 unable to speak English. By the 1970s, after
designing commodities trading software, he bought his own seat on
the American Stock Exchange and began trading options. He founded
Interactive Brokers and today is worth an estimated $5 billion
according to Forbes.

AT:Where did you get the idea for e-options
trading from?

Thomas: Open outcry trading never worked for
options because of the time priority among market makers for the
many series that the specialists or exchange officials could not
keep track of. This resulted in constant squabbles which, due to
my small stature and poor English, I could never prevail in. I
needed a computerised world to win.

AT:Do you think current regulation
addresses market making obligations sufficiently?

Thomas: NO, formal market maker obligations were
gradually weakened over the years.

AT:Is it beneficial for the market to have
a small group of institutions performing market making functions
in the options world?

Thomas: Those benefits are diminishing. Ideally,
market makers would have firm obligations to make two-sided
markets at all times except for technical outages. Unfortunately,
this could not be enforced today because of rampant insider
trading and front-running of news.

AT:How can firms such as Interactive
Brokers speed up the process of transferring options to fully
electronic trading from pit traders?

Thomas: There is a very small and weak
constituency today in favour of doing that. It is the few genuine
market makers against all the investment banks who were able to
convince their institutional clients that an opaque market is
better for them than a transparent one.

AT:What's the next step in the evolution of
HFT in options trading?

Thomas: I have been advocating the slowing down
of liquidity removing orders by exchanges for a random number of
milliseconds up to 500. This would encourage HFTs to provide
liquidity which they claim they are doing anyway.